Value costing remains an important aspect of strategic business decisions. It allows decision-makers a rapid snapshot of optimal output levels with respect to variable costs, price-point, and profitability. While CVP makes several assumptions that limit its application to specifics, it remains an important part of accounting for decision-makers. (969 words, APA format, with references).© BrainMass Inc. brainmass.com May 20, 2020, 8:51 pm ad1c9bdddf
Value costing will always be relevant to business enterprises. Simply put, it is a powerful management tool to address a problem common to every enterprise-how to sync up each element toward the common goal. "The mismatch between strategies and tactics... with the overall goals and objectives of the organization trigger most of the non-value adding activities in operations," (Gupta & Gunasekaran, 2005, pg.338). Value costing strips costs and value of window dressing, and lays objective data bare for consideration. Thankfully for the professional accountants among readers, there is no single answer for the 'correct' method, however. While simplicity is the strength of Cost-Volume-Profit (CVP) techniques, it also is its limitation.
There must always be a balance between resources and quality in any enterprise. While this may sound obvious, it strikes to the crux of CVP's usefulness. If accounting techniques are considered a spectrum, with infinitely expensive (as measured in time or money) and infinitely accurate on the right side-and free (again, as measured in time or money) but grossly over generalized at the left-CVP would lay on the left side of the spectrum, providing quick, simple information for decision making.
First, consider the concept of contribution margin (CM). Unit contribution margin is defined by the difference between revenue (R) and variable costs (VC)-where variable costs consist of whatever input per unit is required to prepare it for sale (Vakkur):
R-VC= CM (in dollars, per unit or gross) or VC/R ...
The future applicability of CVP (Cost, Volume, Profit) analysis is discussed. Sample calculations are included to illustrate CVP's continued usefulness in strategic accounting.